Unemployment Theory and Measurement

Flashcards covering the definitions of unemployment types, labor market ratios, and the theories explaining the natural rate of unemployment from the May 2026 SNU Business School lecture.

Natural Rate of Unemployment

The amount of unemployment that the economy normally experiences and which does not go away on its own, even in the long run.

Cyclical Unemployment

The year-to-year fluctuations in unemployment around its natural rate, closely associated with short-run business cycles.

Employed

Includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member's business, plus those temporarily absent due to vacation or illness.

Unemployed

Includes those who were not employed, were available for work, and had tried to find employment during the previous four weeks, as well as those waiting to be recalled from a layoff.

Not in the Labor Force

Individuals who fit neither the employed nor unemployed categories, such as full-time students, homemakers, and retirees.

Labor Force

The total sum of the employed and the unemployed.

Unemployment Rate

\frac{\text{# of unemployed}}{\text{Labor force}} \times 100

Labor-Force Participation Rate

$$\frac{\text{Labor Force}}{\text{Adult Population}} \times 100$$

Discouraged Workers

Individuals who would like to work but have given up looking for a job after an unsuccessful search; they are counted as 'not in the labor force' rather than unemployed.

Marginally Attached Workers

A measure of labor underutilization referring to persons who are not in the labor force, want and are available for work, and had looked for a job sometime in the prior 12 months.

Frictional Unemployment

Unemployment that results because it takes time for workers to search for a job that best suits their tastes and skills.

Structural Unemployment

Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Job Search

The process by which workers find appropriate jobs given their tastes and skills.

Sectoral Shifts

Changes in the composition of demand among industries or regions that make some frictional unemployment inevitable.

Union

A worker association that acts as a type of 'cartel' to exert joint market power and bargain with employers over wages and conditions.

Insiders vs. Outsiders

A conflict where union members (insiders) benefit from higher wages, while other workers (outsiders) lose jobs or must seek nonunion employment.

Efficiency Wages

Above-equilibrium wages paid by firms to increase worker productivity by improving health, reducing turnover, and attracting higher-quality applicants.

Worker Turnover

The frequency of workers quitting a job; efficiency wages aim to reduce this to lower hiring and training expenses.

Shirking

The act of workers providing less than full effort; high efficiency wages deter this by making the job more valuable to the worker.

Henry Ford's $5-a-Day Wage

A 1914 case study where a wage increase resulted in a surplus of job seekers, lower turnover, and skyrocketed productivity.